<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number 1-5725
QUANEX CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
-------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
- --------------------------------------- -----------------------------
Common Stock, par value $0.50 per share 14,249,201
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - April 30, 1999 and
October 31, 1998 ....................................... 1
Consolidated Statements of Income - Three and Six Months
Ended April 30, 1999 and 1998 .......................... 2
Consolidated Statements of Cash Flow - Six months
Ended April 30, 1999 and 1998 .......................... 3
Notes to Consolidated Financial Statements ................ 4 - 7
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition ........................ 8 - 17
Item 3: Quantitative and Qualitative Disclosure about Market
Risk ...................................................... 17
Part II Other Information
Item 1: Legal Proceedings ............................................. 18
Item 4: Submission of Matters to a Vote of Security Holders ........... 18
Item 5: Other Information ............................................. 18
Item 6: Exhibits and Reports on Form 8-K .............................. 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 33,223 $ 26,279
Accounts and notes receivable, net....................... 79,586 85,166
Inventories.............................................. 78,669 85,397
Deferred income taxes.................................... 11,119 11,560
Prepaid expenses ........................................ 2,989 1,410
----------- -----------
Total current assets............................. 205,586 209,812
Property, plant and equipment.............................. 730,379 702,955
Less accumulated depreciation and amortization............. (329,401) (307,901)
----------- -----------
Property, plant and equipment, net......................... 400,978 395,054
Goodwill, net.............................................. 49,961 52,281
Other assets............................................... 17,229 17,141
----------- -----------
$ 673,754 $ 674,288
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 68,082 $ 75,160
Accrued expenses ........................................ 56,003 56,125
Current maturities of long-term debt..................... 7,994 12,248
Income taxes payable .................................... 3,827 3,300
----------- -----------
Total current liabilities........................ 135,906 146,833
Long-term debt ............................................ 191,611 188,302
Deferred pension credits .................................. 7,595 7,832
Deferred postretirement welfare benefits................... 7,250 7,092
Deferred income taxes ..................................... 32,785 33,412
Other liabilities ......................................... 17,529 18,773
----------- -----------
Total liabilities ............................... 392,676 402,244
Stockholders' equity:
Preferred stock, no par value............................ -- --
Common stock, $.50 par value............................. 7,125 7,090
Additional paid-in capital............................... 109,872 108,624
Retained earnings........................................ 165,776 156,278
Cumulative foreign currency translation adjustment....... (615) 1,132
Adjustment for minimum pension liability................. (1,080) (1,080)
----------- -----------
Total stockholders' equity....................... 281,078 272,044
----------- -----------
$ 673,754 $ 674,288
=========== ===========
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ................................................ $ 202,879 $ 203,428 $ 385,982 $ 384,410
Cost and expenses:
Cost of sales .......................................... 160,147 166,421 308,882 320,703
Selling, general and administrative expense ............ 13,187 11,995 27,489 23,335
Depreciation and amortization .......................... 11,405 10,911 22,977 21,478
--------- --------- --------- ---------
Operating income ......................................... 18,140 14,101 26,634 18,894
Other income (expense):
Interest expense ....................................... (3,605) (3,661) (7,286) (7,405)
Capitalized interest ................................... 475 1,219 821 2,696
Other, net ............................................. 31 351 825 1,352
Income from continuing operations --------- --------- --------- ---------
before income taxes ................................. 15,041 12,010 20,994 15,537
Income tax expense ....................................... (5,264) (4,254) (7,348) (5,488)
--------- --------- --------- ---------
Income from continuing operations ........................ 9,777 7,756 13,646 10,049
Gain on sale of discontinued operations, net
of income taxes ..................................... -- -- -- 13,606
--------- --------- --------- ---------
Income before extraordinary charge ....................... 9,777 7,756 13,646 23,655
Extraordinary gain - early
extinguishment of debt .............................. 415 -- 415 --
--------- --------- --------- ---------
Net income ............................................... $ 10,192 $ 7,756 $ 14,061 $ 23,655
========= ========= ========= =========
Earnings per common share:
Basic:
Continuing operations .............................. $ 0.69 $ 0.55 $ 0.96 $ 0.71
Gain on sale of discontinued operations ............ -- -- -- 0.97
Extraordinary item ................................. 0.03 -- 0.03 --
--------- --------- --------- ---------
Total basic net earnings ........................ $ 0.72 $ 0.55 $ 0.99 $ 1.68
========= ========= ========= =========
Diluted:
Continuing operations .............................. $ 0.64 $ 0.51 $ 0.93 $ 0.70
Gain on sale of discontinued operations ............ -- -- -- 0.95
Extraordinary item ................................. 0.02 -- 0.02 --
--------- --------- --------- ---------
Total diluted net earnings ...................... $ 0.66 $ 0.51 $ 0.95 $ 1.65
========= ========= ========= =========
Weighted average shares outstanding:
Basic ................................................. 14,249 14,154 14,236 14,119
========= ========= ========= =========
Diluted ............................................... 16,818 17,110 16,846 14,331
========= ========= ========= =========
Common stock dividends per share ......................... $ 0.16 $ 0.16 $ 0.32 $ 0.32
</TABLE>
2
<PAGE> 5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
---------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income ................................................................ $ 14,061 $ 23,655
Adjustments to reconcile net income
to cash provided by operating activities:
Gain on sale of discontinued operations .............................. -- (13,606)
Extraordinary gain on early extinguishment of debt ................... (638) --
Depreciation and amortization ........................................ 23,254 21,761
Deferred income taxes ................................................ (589) 3,173
Deferred pension costs ............................................... (237) (2)
Deferred postretirement welfare benefits ............................. 158 86
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Increase/(decrease) in accounts and notes receivable ................. 4,969 (2,312)
Decrease in inventory ................................................ 6,294 96
Increase/(decrease) in accounts payable .............................. (6,729) 5,048
Increase in accrued expenses ......................................... 168 745
Other, net ........................................................... (1,638) (9,143)
--------- ---------
Cash provided by operating activities ........................... 39,073 29,501
Investment activities:
Proceeds from the sale of discontinued operations ......................... -- 31,434
Capital expenditures, net of retirements .................................. (30,338) (27,134)
Other, net ................................................................ (753) (1,868)
--------- ---------
Cash provided (used) by investment activities ................... (31,091) 2,432
--------- ---------
Cash provided by operating and
investment activities ........................................ 7,982 31,933
Financing activities:
Bank borrowings (repayments), net ......................................... 11,108 (10,144)
Purchase of subordinated debentures ....................................... (8,799) --
Common dividends paid ..................................................... (4,560) (4,522)
Issuance of common stock, net ............................................. 1,283 2,973
Other, net ................................................................ (29) --
--------- ---------
Cash used in financing activities ............................... (997) (11,693)
Effect of exchange rate changes on cash and equivalents ..................... (41) 19
--------- ---------
Increase in cash and equivalents ............................................ 6,944 20,259
Cash and equivalents at beginning of period ................................. 26,279 26,851
--------- ---------
Cash and equivalents at end of period ....................................... $ 33,223 $ 47,110
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................................... $ 6,963 $ 7,173
Income taxes ................................................................ $ 7,174 $ 10,032
</TABLE>
3
<PAGE> 6
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The interim consolidated financial statements of Quanex Corporation and
subsidiaries ("the Company") are unaudited, but include all adjustments which
the Company deems necessary for a fair presentation of its financial position
and results of operations. All such adjustments are of a normal recurring
nature. Results of operations for interim periods are not necessarily indicative
of results to be expected for the full year. All significant accounting policies
conform to those previously set forth in the Company's fiscal 1998 Annual Report
on Form 10-K which is incorporated by reference. Certain amounts for prior
periods have been reclassified in the accompanying consolidated financial
statements to conform to 1999 classifications.
2. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: April 30, October 31,
1999 1998
--------- -----------
(In thousands)
<S> <C> <C>
Raw materials ........................................ $ 20,578 $ 25,167
Finished goods and work in process ................... 51,010 52,485
--------- ---------
71,588 77,652
Other ................................................ 7,081 7,745
--------- ---------
$ 78,669 $ 85,397
========= =========
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO ................................................... $ 59,435 $ 57,594
FIFO ................................................... 19,234 27,803
--------- ---------
$ 78,669 $ 85,397
========= =========
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $10 million and $12 million at April
30, 1999, and October 31, 1998, respectively.
3. Acquisition
On October 9, 1998, the Company acquired the stock of Decatur Aluminum Corp.,
a Decatur, Alabama based coiled aluminum sheet manufacturer, for approximately
$19 million. Included in the purchase price was debt totaling $5 million and
other specified liabilities totaling $5 million assumed by the Company. The
newly acquired company has been renamed Nichols Aluminum-Alabama, Inc. ("Nichols
Aluminum Alabama"). Based on preliminary purchase accounting, goodwill
associated with Nichols Aluminum Alabama is approximately $10 million as of
April 30, 1999. Nichols Aluminum Alabama's operations include cold rolling
aluminum sheet to specific gauge, annealing, leveling, custom painting and
slitting to width.
4. Discontinued Operations
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"). The sale was effective November 1,
1997. The Company recorded an after tax gain on the sale of $12.8 million during
the first quarter of fiscal 1998.
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale of
$36.3 million in the second quarter of fiscal 1997 and an additional $833
thousand in the first quarter of 1998 as a result of post-closing adjustments.
4
<PAGE> 7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.Earnings Per Share
The following table presents information necessary to calculate basic and
diluted earnings per share per FAS 128 for the periods indicated (in thousands
except per share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
April 30, 1999 April 30, 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
BASIC EPS ----------- ------------- ------- ----------- ------------- -------
Income from Cont. Oper. $ 9,777 14,249 $ 0.69 $ 7,756 14,154 $ 0.55
Extra. Gain - early debt ext. 415 .03 -- --
----------- ------- ----------- -------
Total basic net earnings $10,192 $ 0.72 $ 7,756 $ 0.55
=========== ======= =========== =======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options -- 5 -- 260
Effect of conversion of
subordinated debentures 950 2,564 999 2,696
DILUTED EPS
Income from Cont. Oper $ 10,727 16,818 $ 0.64 $ 8,755 17,110 $ 0.51
Extra. Gain - early debt ext. 415 .02 -- --
---------- ------- ----------- -------
Total diluted net earnings $ 11,142 $ 0.66 $ 8,755 $ 0.51
========== ======= =========== =======
For the Six Months Ended For the Six Months Ended
April 30, 1999 April 30, 1998
--------------------------------------------------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
BASIC EPS ----------- ------------- ------- ----------- ------------- -------
Income from Cont. Oper $ 13,646 14,236 $ 0.96 $ 10,049 14,119 $ 0.71
Gain on Sale of Discont. Oper. -- -- 13,606 0.97
Extra. Gain - early debt ext. 415 .03 -- --
----------- ------- ----------- -------
Total basic net earnings $14,061 $ 0.99 $ 23,655 $ 1.68
=========== ======= =========== =======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options -- 8 -- 212
Effect of conversion of
subordinated debentures(1) 1,928 2,602 -- --
DILUTED EPS
Income from Cont. Oper. $ 15,574 16,846 $ 0.93 $ 10,049 14,331 $ 0.70
Gain on Sale of Discont. Oper. -- -- 13,606 0.95
Extra. Gain - early debt ext. 415 .02 -- --
---------- ------- ----------- -------
Total diluted net earnings $ 15,989 $ 0.95 $ 23,655 $ 1.65
========== ======= =========== =======
</TABLE>
(1) Conversion of the Company's 6.88% convertible subordinated debentures into
common stock was not considered in the computation of diluted EPS for the six
months ended April 30, 1998 because it was anti-dilutive.
5
<PAGE> 8
6. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. In accordance with this new pronouncement, the Company has
calculated total comprehensive income for the three and six months ended April
30, 1999 to be $9,086 and $12,314, respectively. Comprehensive income for the
three and six months ended April 30, 1998 is $7,815 and $23,086, respectively.
Included in comprehensive income is net income, the change in the cumulative
foreign currency translation adjustment balance and the change in the adjustment
for minimum pension liability balance.
7. Extraordinary Item
During the first six months of fiscal 1999, the Company accepted unsolicited
block offers to buy back $9.7 million principal amount of the 6.88% Convertible
Subordinated Debentures for $8.8 million in cash. An after tax extraordinary
gain of $415 thousand was recorded on this transaction. The principal amount of
bonds outstanding as of April 30, 1999 was $73,720,000.
8. Second Amended and Restated Rights Agreement
The Company approved an amended shareholder rights plan during the second
quarter of fiscal 1999. Named the Second Amended and Restated Rights Agreement,
the updated plan went into effect April 15, 1999 and replaced the Amended and
Restated Rights Agreement which was established 10 years earlier. The Amended
and Restated Rights Agreement and the Preferred Share Purchase Rights granted
pursuant thereto were scheduled to expire on April 26, 1999. With the Second
Amended and Restated Rights Agreement, Quanex's shareholder rights plan has been
extended 10 years to April 15, 2009. Additionally, the purchase price was
increased from $60.00 to $90.00.
6
<PAGE> 9
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Industry Segment Information
<TABLE>
<CAPTION>
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
April 30, 1999 Steel Bars Sheet Products Products Other(1) Consolidated
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies ....... $ 72,951 $ 72,005 $ 57,923 $ 0 $ 202,879
Intersegment(2).................. 1,908 4,862 0 (6,770) --
--------- -------- -------- -------- ----------
Total ............................. $ 74,859 $ 76,867 $ 57,923 $ (6,770) $ 202,879
========= ======== ======== ======== ==========
Operating income (loss) ........... $ 14,314 $ 3,034 $ 3,059 $ (2,267) $ 18,140
========= ======== ======== ======== ==========
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
April 30, 1998 Steel Bars Sheet Products Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ........ $ 88,231 $ 60,567 $ 54,630 $ 0 $ 203,428
Intersegment(2)... ............... 722 4,887 -- (5,609) --
--------- -------- -------- -------- ----------
Total .............................. $ 88,953 $ 65,454 $ 54,630 (5,609) $ 203,428
========= ======== ======== ======== ==========
Operating income (loss) ............ $ 16,363 $ (1,483) $ 2,268 $ (3,047) $ 14,101
========= ======== ======== ======== ==========
Corporate
Six Months Ended Engineered Aluminum Mill Engineered and
April 30, 1999 Steel Bars Sheet Products Products Other(1) Consolidated
- --------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ........ $ 136,947 $138,449 $ 110,586 $ -- 385,982
Intersegment(2)................... 3,009 9,838 1 (12,848) --
--------- -------- -------- -------- ----------
Total .............................. $ 139,956 $148,287 $ 110,587 $(12,848) $ 385,982
========= ======== ======== ======== ==========
Operating income (loss) ............ $ 25,617 $ 5,199 $ 2,837 $ (7,019) $ 26,634
========= ======== ======== ======== ==========
Corporate
Six Months Ended Engineered Aluminum Mill Engineered and
April 30, 1998 Steel Bars Sheet Products Products Other(1) Consolidated
- --------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ........ $ 167,428 $113,126 $ 103,856 $ -- $ 384,410
Intersegment(2)................... 1,616 9,676 -- (11,292) --
--------- -------- -------- -------- ----------
Total .............................. $ 169,044 $122,802 $ 103,856 $(11,292) $ 384,410
========= ======== ======== ======== ==========
Operating income (loss) ............ $ 28,122 $ (3,663) $ 1,807 $ (7,372) $ 18,894
========= ======== ======== ======== ==========
(1) Included in "Corporate and Other" are intersegment eliminations and corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
</TABLE>
7
<PAGE> 10
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
GENERAL
The discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the April 30, 1999 and October 31,
1998 Consolidated Financial Statements of the Company and the accompanying
notes.
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain forward-looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in the
forward-looking statements contained in this report. Such factors include
domestic and international economic activity, prevailing prices of steel and
aluminum scrap and other raw material costs, interest rates, construction
delays, market conditions for the Company's customers, any material changes in
purchases by the Company's principal customers, environmental regulations and
changes in estimates of costs for known environmental remediation projects and
situations, world-wide political stability and economic growth, the Company's
successful implementation of its internal operating plans and Year 2000
readiness efforts, performance issues with key customers, suppliers and
subcontractors, and regulatory changes and legal proceedings. Accordingly, there
can be no assurance that the forward-looking statements contained herein will
occur or that objectives will be achieved.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales: (Dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
1999 1998 1999 1998
Dollar % of Dollar % of Dollar % of Dollar % of
Amount Sales Amount Sales Amount Sales Amount Sales
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 202.9 100% $ 203.4 100% $ 386.0 100% $ 384.4 100%
Cost of Sales 160.2 79 166.4 82 308.9 80 320.7 83
Sell., gen. and admin. 13.2 6 12.0 6 27.5 7 23.3 6
Deprec. and amort. 11.4 6 10.9 5 23.0 6 21.5 6
------- ----- ------- ----- -------- ----- ------- -----
Operating Income 18.1 9% 14.1 7% 26.6 7% 18.9 5%
Interest Expense (3.6) (2) (3.7) (2) (7.3) (2) (7.4) (2)
Capitalized Interest .5 0 1.2 1 .8 0 2.7 1
Other, net 0 0 .4 0 .8 0 1.3 0
Income tax expense (5.2) (2) (4.2) (2) (7.3) (1) (5.5) (1)
------- ----- ------- ----- -------- ----- ------- -----
Income from continuing operations
$ 9.8 5% $ 7.8 4% $ 13.6 4% $ 10.0 3%
======= ======= ======== =======
</TABLE>
The Company achieved significantly higher earnings on essentially the same sales
levels for the second quarter and the six-month period of fiscal 1999 compared
with the same periods of fiscal 1998. The primary contributing factors were
higher sales and operating efficiencies in the Nichols Aluminum division
resulting from sales by Nichols Aluminum Alabama, Inc. which was acquired in
October 1998, lower steel and aluminum scrap prices and some operating
improvements achieved at other business units. Additionally, there were some
benefits realized at the engineered steel bar business which amounted to
approximately $2 million (pre-tax) as a result of a
8
<PAGE> 11
business interruption insurance recovery and an electrode litigation settlement
received during the first quarter of fiscal 1999.
Business Segments
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services and steel bar and tube wear and
corrosion resistant finishing services. The aluminum mill sheet segment
manufactures mill finished and coated aluminum sheet. The engineered products
segment manufactures impact-extruded and machined aluminum and steel parts,
aluminum window and patio door screens, window frames and other roll formed
products and stamped shapes.
The following table sets forth selected operating data for the Company's
three business segments:
<TABLE>
<CAPTION>
THREE Months Ended SIX Months Ended
April 30, April 30,
1999 1998 1999 1998
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Engineered Steel Bars:
Net sales........................... $ 74,859 $ 88,953 $139,956 $169,044
Operating income.................... 14,314 16,363 25,617 28,122
Deprec. and amort................... 4,056 3,385 8,112 6,762
Identifiable assets................. $224,556 $205,472 $224,556 $205,472
Aluminum Mill Sheet Products:(1)
Net sales........................... $ 76,867 $ 65,454 $148,287 $122,802
Operating income (loss)............. 3,034 (1,483) 5,199 (3,663)
Deprec. and amort................... 3,128 2,724 6,258 5,468
Identifiable assets................. $194,393 $164,462 $194,393 $164,462
Engineered Products:
Net sales........................... $ 57,923 $ 54,630 $110,587 $103,856
Operating income.................... 3,059 2,268 2,837 1,807
Deprec. and amort................... 4,187 4,768 8,541 9,180
Identifiable assets................. $213,273 $280,277 $213,273 $280,277
</TABLE>
================================================================================
(1) 1999 results include Nichols Aluminum Alabama's operations acquired
October 9, 1998. (See Note 3 to financial statements)
9
<PAGE> 12
The engineered steel bar business posted another good quarter, though it did not
beat the record results achieved in the prior year's second quarter. Demand in
the automotive and heavy truck markets continues to be good, but other markets
are experiencing fair to weak business conditions. This slowdown, in combination
with the scheduled shutdown for maintenance projects, contributed to lower
volumes and sales for engineered steel bars for the six months ended April 30,
1999. Despite lower volume and net sales, operating income levels remained
relatively strong. This is largely due to the lower steel scrap material costs
experienced during the first six months of fiscal 1999 as compared to 1998.
Additionally, there were some benefits realized which amounted to approximately
$2 million (pre-tax) as a result of a business interruption insurance recovery
and an electrode settlement received during the first quarter of fiscal 1999.
The $16 million Phase IV expansion project that will double MACSTEEL's shipping
capacity for MACPLUS cold finished steel bars was completed at both of the
engineered bar mills during the second quarter of fiscal 1999. Production is
underway at the Fort Smith facility while trials are taking place at the Jackson
facility. Our premium, value-added engineered steel bar, MACPLUS, is designed
for precise, mission-critical applications and remains in high demand by
original equipment manufacturer ("OEM") customers who require steel bars
featuring defect-free surfaces with tight dimensional tolerances and
concentricity.
The aluminum mill sheet business achieved increases in volume, net
sales and operating income for the first six months of fiscal 1999 as compared
to 1998. These increases were a result of the additional finishing capacity
brought by the acquisition of Nichols Aluminum Alabama in October of 1998 as
well as falling prices for aluminum scrap. All of Nichols' facilities are
benefiting from the acquisition which allows them to realize gains and
efficiencies obtainable by running at higher volumes and operating with greater
flexibility. The casting plant is utilizing its two new rotary furnaces and
dross recovery system to melt more economical aluminum scrap and improve the
yield of scrap to molten metal. Continuous improvement projects are underway at
Nichols' casting and finishing operations to identify and remove constraints
throughout their manufacturing processes including restoration and improvement
projects for the Alabama-based mill.
The engineered products business experienced seasonally strong demand
for residential products and strong demand in automotive markets which resulted
in the business being able to recover the operating losses experienced in the
first three months of the fiscal year and show operating income for the six
months ended April 30, 1999. Additionally, cost-control measures at the Piper
Impact facility began showing success as the higher labor costs that had been
experienced in the first three months of fiscal 1999 were reduced in the second
quarter. The higher labor costs experienced in the first three months were a
result of lower productivity as employees at Piper Impact's New Albany,
Mississippi operations were being trained to finish products that were
previously processed at the Company's Utah-based facility. As of the end of May
1999, production has ceased at the Utah facility. Piper Impact's development of
new products for both steel and aluminum impact extrusions continues for
applications in automotive, defense and other industries. Fabricated Products
(AMSCO and Homeshield) began increasing production for the typically busy summer
months ahead, continuing to emphasize profit margin improvement, business
expansion and diversification.
Outlook
The Company currently expects that overall business levels for the remainder of
fiscal 1999 should be similar to those experienced during 1998, excluding the
one-time, mostly non-cash restructuring charge taken in the fourth quarter of
fiscal 1998. The higher sales volume in the aluminum mill sheet segment is
expected to offset the slowing demand in the engineered steel bar segment. The
engineered products segment anticipates softening demand for aluminum air bag
components partially offset by seasonally strengthening demand for fabricated
residential building products. The improved spreads resulting from lower steel
and aluminum scrap for the first six months of 1999 may not continue for the
remainder of 1999 as steel and aluminum scrap prices have seemingly begun an
upward trend. Also, we
10
<PAGE> 13
expect continued benefits to sales and earnings for the remainder of fiscal 1999
from the acquisition of Nichols Aluminum Alabama. Domestic and global market
factors will impact the Company and any slowdown in the U.S. economy could
adversely affect demand and pricing for many of the Company's products.
Fiscal Quarter and Six months ended April 30, 1999 vs. 1998
Net Sales - Consolidated net sales for the three and six months ended April 30,
1999, were $202.9 and $386.0 million, respectively, representing a decrease of
$.5 million, or .2%, and an increase of $1.6 million, or .4%, when compared to
consolidated net sales for the same periods in 1998. Increased net sales in the
aluminum mill sheet and engineered products businesses were offset by lower net
sales at the Company's engineered steel bar business.
Net sales from the Company's engineered steel bar business for the three
and six months ended April 30, 1999, were $74.9 and $140.0 million,
respectively, representing a decrease of $14.1 million, or 16%, and $29.1
million, or 17%, when compared to the same periods last year. This decline was
principally due to the reduced demand in some of the durable goods market,
inventory adjustments by some customers and pricing pressures resulting from
global sourcing of engineered bars and forged components.
Net sales from the Company's aluminum mill sheet products business for the
three and six months ended April 30, 1999, were $76.9 and $148.3 million,
respectively, representing an increase of $11.4 million, or 17%, and $25.5
million, or 21%, when compared to the same periods last year. This increase was
largely due to the acquisition of Nichols Aluminum Alabama in October of 1998 as
well as strong demand in the building products market.
Net sales from the Company's engineered products business for the three and
six months ended April 30, 1999, were $57.9 and $110.6 million, respectively,
representing an increase of $3.3 million, or 6%, and $6.7 million, or 6%, when
compared to the same periods last year. This increase is due to increased sales
at both Piper facilities as well as the Fabricated Products divisions. These
increases are a result of strong demand for residential and automotive products.
Operating income - Consolidated operating income for the three and six
months ended April 30, 1999, was $18.1 and $26.6 million, respectively,
representing an increase of $4.0 million, or 29%, and $7.7 million, or 41%, when
compared to the same periods last year. The increase was due to increased
operating income at the aluminum mill sheet products business and the engineered
products segment, partially offset by lower operating income in the engineered
steel bar segment.
Operating income from the Company's engineered steel bar business for the
three and six months ended April 30, 1999, was $14.3 and $25.6 million,
respectively, representing a decrease of $2.0 million, or 13%, and $2.5 million,
or 9%, when compared to the same periods last year. These decreases were due to
reduced volume and net sales, largely offset by higher spreads realized from
lower steel scrap prices and productivity improvements from the Phase III
project completed in 1998. Additionally, approximately $2 million of benefits
were realized as a result of a business interruption insurance recovery and an
electrode litigation settlement received in the first fiscal quarter.
Operating income from the Company's aluminum mill sheet products business
for the three and six months ended April 30, 1999, was $3.0 and $5.2 million,
respectively, compared to an operating losses of $1.5 and $3.7 million for the
same periods last year. This increase was largely due to higher sales and
operating efficiencies realized from the acquisition of Nichols Aluminum Alabama
and improved spreads resulting from lower aluminum scrap prices as well as
benefits from the new rotary furnaces and the dross recovery system.
11
<PAGE> 14
Operating income from the Company's engineered products business for the
three and six months ended April 30, 1999, was $3.1 and $2.8 million,
respectively, representing a $.8 million, or 35%, and $1.0 million, or 57%,
increase when compared to the same periods last year. The improvement was
largely due to increased sales at the Fabricated Products Division (AMSCO and
Homeshield) as well as at the Piper facilities.
Selling, general and administrative expenses increased by $1.2 million, or
10%, and $4.2 million, or 18%, respectively, for the three and six months ended
April 30, 1999, as compared to the same periods of last year. This increase is
largely a result of the acquisition of Nichols Aluminum Alabama, Year 2000
readiness efforts, relocation expenses and consulting expenses for system
implementations.
Depreciation and amortization increased by $.5 million, or 5%, and $1.5
million, or 7%, respectively, for the three and six months ended April 30, 1999,
as compared to the same periods of last year. The increase is principally due to
increased depreciation at the engineered steel bar and aluminum mill sheet
products businesses for recently completed projects as well as the inclusion of
Nichols Aluminum Alabama, which was acquired in October 1998, partially offset
by lower depreciation and amortization at the engineered products business.
Interest expense remained relatively constant for the three and six months
ended April 30, 1999, as compared to the same periods of 1998.
Capitalized interest decreased by $.7 and $1.9 million, respectively, for
the three and six months ended April 30, 1999, as compared to the same periods
of 1998 primarily due to the completion of significant capital projects at
MACSTEEL and completion of the steel plant at Piper Impact.
Other, net decreased $.3 and $.5 million, respectively, for the three and
six months ended April 30, 1999, as compared to the same periods of 1998
primarily as a result of decreased investment income on lower cash balances.
Income from continuing operations increased $2.0 million, or 26%, and $3.6
million, or 36%, respectively, for the three and six months ended April 30,
1999, as compared to the same periods of 1998. The increase was principally due
to increased operating earnings from the Company's aluminum mill sheet products
and the engineered products businesses.
Net income was $10.2 and $14.1 million, respectively, for the three and six
months ended April 30, 1999, compared to $7.8 and $23.7 million for the same
periods of 1998. Included in net income for the first quarter of fiscal 1998 was
$13.6 million of gain on the sale of discontinued operations, net of taxes.
Included in net income for the second fiscal quarter of 1999 was $415 thousand
of extraordinary gain on the early extinguishment of debt, net of taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). At April 30, 1999, the Company had $90
million borrowed against the Bank Agreement. There have been no significant
changes to the Company's debt structure or level of borrowings under the various
debt facilities during the six month period ended April 30, 1999.
During the first six months of fiscal 1999 the Company accepted
unsolicited block offers to buy back $9.7 million principal amount of
convertible subordinated debentures for $8.8 million in cash. An after tax
extraordinary gain of $415 thousand was recorded on this transaction.
At April 30, 1999, the Company had commitments of approximately $20 million
for the purchase or construction of capital assets, primarily relating to the
Company's
12
<PAGE> 15
continued expansions at MACSTEEL and Piper Impact. The Company plans to fund
these capital expenditures through cash flow from operations and, if necessary,
additional borrowings.
The Company believes that it has sufficient funds and adequate financial
sources available to meet its anticipated liquidity needs. The Company also
believes that cash flow from operations, cash balances and available borrowings
will be sufficient for the foreseeable future to finance anticipated working
capital requirements, capital expenditures, debt service requirements,
environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during the six months ended April 30, 1999
was $39.1 million. This represents an increase of $9.6 million, or 32%, compared
to the six months ended April 30, 1998. This increase is a result of several
factors including:
1) increased cash resulting from the improved operating earnings of the
first six months of fiscal 1999 compared to the same period of 1998,
2) lower taxes paid in the six month period ended April 30, 1999 compared to
1998, (higher tax payments were made in the six months ended 1998 due to
the gain on the sale of discontinued operations),
3) lower working capital requirements in the six month period ended April
30, 1999 compared to 1998 as a result of the completion of the Phase III
expansion project and better working capital management.
Investment Activities
Net cash used by investment activities during the six months ended April 30,
1999 was $31.1 million compared to $2.4 million provided by investment
activities for the same period of 1998 because fiscal 1998 cash from investing
activities included proceeds from the sale of the Tubing Operations of $31.4
million. Capital expenditures and other investment activities remained similar
for the two periods. The Company estimates that fiscal 1999 capital expenditures
will approximate $60 to $65 million.
Financing Activities
Net cash used by financing activities for the six months ended April 30, 1999
was $1.0 million, compared to $11.7 million for the same prior year period. The
Company borrowed $11.1 million during the first half of fiscal 1999 compared
with the repayment of $10.1 million during the same period last year. In 1999,
the Company purchased $9.7 million principal value of its subordinated
debentures for $8.8 million in cash.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company continues to
analyze SFAS No. 132 to determine what additional disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2001. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will
analyze SFAS No. 133 to determine what, if any, impact or additional disclosure
requirements this pronouncement will have.
13
<PAGE> 16
YEAR 2000
The Company, like other businesses, is facing the Year 2000 issue. Many computer
systems and equipment with embedded chips or processors use only two digits to
represent the calendar year. This could result in computational or operational
errors as dates are compared across the century boundary causing possible
disruptions in business operations. The Year 2000 issue can arise at any point
in the Company's supply, manufacturing, processing, distribution, and financial
chains.
State of Readiness
The Company began addressing the Year 2000 issue in 1997, with an initial
assessment of Year 2000 readiness efforts at each of its operating units. Based
on responses from the operating units, a standardized Year 2000 Plan format was
developed. By July 1998, each operating unit had developed a Year 2000 Plan that
included the following components:
1. Inventory of all systems - identifying them as critical and non-critical
2. Assessment of all systems for Year 2000 compliance
3. Development of a project schedule for remediation or replacement of
non-compliant systems
4. Development of a project schedule for testing the compliant systems
5. Development of a list of significant vendors/suppliers for surveying their
Year 2000 readiness efforts
The Year 2000 issue is being addressed within the Company by its individual
business units, and progress is reported periodically to management. The Company
committed necessary resources to conduct risk assessment and to take corrective
actions, where required, with a target date of becoming Year 2000 ready for the
most critical systems by July 1999. Testing and implementation of Cyborg, the
human resource management and payroll system may be delayed at some locations.
Business and Information Systems (Information Technology Systems)
Engineered Steel Bars Segment:
Engineered Steel Bars Segment has completed the inventory, assessment, and
remediation/replacement phases. The testing of systems is in progress.
Approximately 90 percent of the testing is finished, with a projected completion
date of July 1999.
Aluminum Mill Sheet Products Segment:
Aluminum Mill Sheet Products segment is in the process of upgrading its
main business system. Approximately 70 percent of the tasks are finished, with a
projected completion date of July 1999. The inventory and assessment phases have
been completed for all other business systems. Remediation/replacement and
testing are scheduled to be complete by June 1999, except for the Human Resource
Management and Payroll system which is projected to be complete by October 1999.
Engineered Products Segment:
Engineered Products Segment has finished the inventory and assessment
phases for all business systems. Fabricated Products Division has remediated or
replaced 90 percent of its critical business systems. Upgrading the balance of
the systems, and testing of all IT Systems is scheduled to be complete by July
1999. Piper Impact is approximately 70 percent finished in the process of
implementing an Enterprise Resource Planning ("ERP") system. Completion of this
implementation, including testing, is projected to occur by September 1999.
Remediation/replacement and testing of remaining business systems at Piper are
at different stages of
14
<PAGE> 17
completion, ranging from 25 to 50 percent. The timeframe for completion is
anticipated to be June to October of 1999.
Non-Information Technology Systems
For Non-IT systems, the inventory phase is complete at all business segments.
The Company is relying on a combination of vendor certification and internal
testing for assessment phase. At Engineered Steel Bars Segment, assessment,
replacement, and testing phases have been completed on approximately 80 percent
of the critical systems. Assessment and testing, with corrective action as
required, at the other two business segments is ranging between 10 and 20
percent accomplished, with anticipated completion by the fourth quarter of 1999.
Third Party Relationships
The Company's business units are in the process of surveying the Year 2000
readiness efforts of critical external parties, including suppliers and
customers. Approximately 700 major suppliers have been contacted. Over 60
percent have responded, with varying levels of readiness being reported.
Follow-up surveys and risk assessments are expected to be complete by July 1999.
Monitoring risk in this area will continue into the third quarter of 1999, as
many suppliers will not have completed their Year 2000 readiness efforts until
such time.
All business segments have recently initiated a survey of major customers'
Year 2000 readiness efforts. Approximately 500 major customers have been
contacted. Less than 30 percent have responded. Monitoring and risk assessment
will continue into the fourth quarter of 1999.
Contingency Planning
The Company is developing contingency plans intended to mitigate possible
disruption in business operations that may result from the Year 2000 issue.
Contingency plans may include stockpiling necessary materials and inventories,
securing alternate sources of supply, adjusting facility shutdown and start-up
schedules, development of manual procedures to execute transactions and complete
processes and other appropriate measures. Once developed, contingency plans will
be continually refined, as additional information becomes available.
Independent Verification and Validation
Quanex commissioned a Third Party Review of its Y2K program. Detailed interviews
were conducted at Quanex's Group and Corporate offices, and at most plant
locations. The results of this study highlighted the progress being made and
pointed out areas where additional resources were needed. As a result of the
review, Quanex has augmented the staff resources working on the Y2K program with
several experienced Y2K project managers and technicians in order to address the
requirements identified. The Company has also retained BrightStar Information
Technology Group, Inc. to provide Y2K Program coordination support for the
Corporate Office, and to assist in the audit of readiness efforts at the
business segments.
Cost
Year 2000 activities and associated costs are being managed within each business
unit. The historical costs of remediation and other activities directly
connected with Year 2000 issues have been less than $ 500,000. The timing of
these expenses may vary and is not necessarily indicative of readiness efforts
or progress to date. Not included in these historical costs are expenditures
associated with normal upgrades and acquisition or implementation of new
business systems planned for other business reasons and not accelerated due to
Year 2000 issues. As of now, the Company's best estimate of total costs,
directly related to Year 2000 issues, is between $2 and $3 million.
15
<PAGE> 18
Risks
Quanex is a diversified and decentralized company comprised of three business
segments. Each of these segments has multiple operating units, resulting in
thirteen separate Year 2000 Plans. Quanex does not have standardized systems
throughout the Company. This diversification has allowed the Company to spread
the risk of the Year 2000 issue, since no one system is responsible for the
entire financial and operational needs of the Company.
While the diversification reduces the risk of a material Year 2000 issue
affecting the entire Company, this same diversification increases the
possibility that the Year 2000 issue will cause a problem at one or more units
since many more systems exist than in a centralized environment. Management is
addressing this issue by requiring regular periodic reporting from each business
unit and monitoring the progress with follow-up review by independent
consultants. However, if implementation of the ERP systems at two major business
units is not completed in a timely manner, the affected units will implement
contingency plans to minimize disruptions in business operations that may result
from the Year 2000 issue.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect the Company's operations. While
each business unit will evaluate the status of its major suppliers' Year 2000
readiness efforts and develop contingency plans to manage the risk, it cannot
eliminate the potential for disruption due to third party failures.
The Company is also dependent upon its customers for sales and cash flow.
Year 2000 interruptions in the operations of its major customers could result in
reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company is in the process of surveying its major customers' Year
2000 readiness efforts to assess risk and develop plans to minimize the impact
on its operations.
The Company believes that it is taking all reasonable steps to ensure Year
2000 readiness. Its ability to meet the projected goals, including the costs of
addressing the Year 2000 issue and the dates upon which compliance will be
attained, depends on the availability and cost of personnel trained in this
area, the timing and success of Year 2000 remediation and testing efforts, the
Year 2000 readiness of its key suppliers and customers and the successful
development and implementation of contingency plans. Although these and other
unanticipated Year 2000 issues could have an adverse effect on the results of
operations or financial condition of the Company, it is not possible to
anticipate the extent of impact or the worst case scenario at this time, since
the contingency plans are still under development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS QUARTERLY REPORT ON
FORM 10-Q ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the Euro, on January 1, 1999. The new currency was introduced in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services among the participating countries.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period
16
<PAGE> 19
of six months from this date, both legacy currencies and the Euro will be legal
tender. On or before July 1, 2002, the participating countries will withdraw all
legacy currency and use exclusively the Euro.
At the current time, the Company does not believe that the conversion to
the Euro will have a material impact on its business or its financial
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company holds certain floating-rate obligations. The exposure of these
obligations to increases in short-term interest rates is limited by interest
rate swap agreements entered into by the Company. These swap agreements
effectively fix the interest rate on all of the Company's variable rate debt,
thus limiting the potential impact that increasing interest rates would have on
earnings. At October 31, 1998 the unrealized losses related to the interest rate
swap agreements were $8.5 million. As of April 30, 1999, the unrealized losses
related to the interest rate swap agreements were $4.8 million. It should be
noted that any change in value of these contracts, real or hypothetical, would
be significantly offset by an inverse change in the value of the underlying
hedged item.
Other than the item mentioned above, there were no other material quantitative
or qualitative changes during the first six months of fiscal 1999 in the
Company's market risk sensitive instruments.
17
<PAGE> 20
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
On or about May 26, 1999, the federal government filed in the United States
District Court for the Southern District of Texas a complaint and proposed
consent decree with respect to alleged violations of the Clean Water Act by the
Company and Vision Metals, Inc. at the Company's former facility in Rosenberg,
Texas. Among other things, the complaint alleged that during the Company's
ownership the plant had discharged water which contained pollutants at levels
greater than applicable effluent limits, had not appropriately monitored its
discharges, and had not adequately notified the federal Environmental
Protection Agency of exceedances. Under the consent decree, which is subject to
public comment and approval of the court, all of the complaint's allegations
against the Company would be settled by payment of a civil penalty in the
amount of $466,421. The Company tendered this matter to Vision Metals for
defense and indemnification pursuant to the purchase agreement by which Vision
Metals acquired the Rosenberg facility and assumed certain environmental
liabilities. Vision Metals has accepted the Company's tender without
reservation.
Item 4 - Submission of Matters to a Vote of Security Holders.
On February 24, 1999, the Company held its Annual Meeting of Stockholders (the
"Annual Meeting").
At the Annual Meeting, Michael J. Sebastian, Russell M. Flaum, and Susan F.
Davis were elected as directors for a three-year term. The following sets forth
the number of shares that voted for and for which votes were withheld of each of
such persons:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Michael J. Sebastian 11,819,823 91,172
Russell M. Flaum 11,821,528 89,467
Susan F. Davis 11,818,721 92,274
</TABLE>
In addition, at the Annual Meeting, the stockholders of the Company ratified the
appointment of Deloitte & Touche LLP as the Company's independent auditors. The
ratification of Deloitte & Touche LLP as the Company's independent auditors was
approved with 11,846,810 votes cast for approval, 29,886 votes cast against, and
34,299 abstentions.
Item 5 - Other Information.
In January 1999, the production and maintenance employees at the Arkansas plant
of MACSTEEL voted to have the United Steel Workers as their bargaining
representative.
A five-year contract was ratified by the United Steel Workers representing 190
employees at the MACSTEEL's Michigan plant as of February 28, 1999.
After the Annual Meeting of Stockholders on February 24, 1999, Robert C. Snyder
retired as chairman of the board of directors and resigned from the board of
directors. The board elected Vernon E. Oechsle to chairman of the board of
directors and chief executive officer of the Company, and named James H. Davis
president and chief operating officer. These actions occurred as part of the
Company's normal management succession. Mr. Snyder's resignation, with the
previously announced retirement of Gerald B. Haeckel, brings the total number of
Quanex board members to eight.
18
<PAGE> 21
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 4 - Second Amended and Restated Rights Agreement dated as of
April 15, 1999, between the Registrant and American Stock
Transfer & Trust Co. as Rights Agent filed as Exhibit 4.1 to
the Registrant's Form 8-K dated April 15, 1999, and
incorporated herein by reference.
Exhibit 27 - Financial Data Schedule - April 30, 1999.
A Report on Form 8-K was filed by the Company on April 16, 1999, regarding the
approval of the Second Amended and Restated Rights Agreement effective April 15,
1999, which made certain amendments to the Amended and Restated Rights Agreement
including 1) extending the expiration date for an additional ten years and 2)
increasing the Purchase Price from $60.00 to $90.00. The Amended and Restated
Rights Agreement and the Preferred Share Purchase Rights granted pursuant
thereto were scheduled to expire on April 26,1999 and have been extended to
April 15, 2009.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ Viren M. Parikh
--------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date June 10, 1999
20
<PAGE> 23
Index to Exhibits
Exhibit
Number Description of Exhibits
Exhibit 4 - Second Amended and Restated Rights Agreement dated as
of April 15, 1999, between the Registrant and American
Stock Transfer & Trust Co. as Rights Agent filed as
Exhibit 4.1 to the Registrant's Form 8-K dated April 15,
1999, and incorporated herein by reference.
Exhibit 27 - Financial Data Schedule - April 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF APRIL 30, 1999 AND THE INCOME STATEMENT FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 33,223
<SECURITIES> 0
<RECEIVABLES> 79,586
<ALLOWANCES> 0
<INVENTORY> 78,669
<CURRENT-ASSETS> 205,586
<PP&E> 730,379
<DEPRECIATION> (329,401)
<TOTAL-ASSETS> 673,754
<CURRENT-LIABILITIES> 135,906
<BONDS> 191,611
0
0
<COMMON> 7,125
<OTHER-SE> 273,953
<TOTAL-LIABILITY-AND-EQUITY> 673,754
<SALES> 385,982
<TOTAL-REVENUES> 385,982
<CGS> 336,371
<TOTAL-COSTS> 336,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,286
<INCOME-PRETAX> 20,994
<INCOME-TAX> 7,348
<INCOME-CONTINUING> 13,646
<DISCONTINUED> 0
<EXTRAORDINARY> 415
<CHANGES> 0
<NET-INCOME> 14,061
<EPS-BASIC> 0.99
<EPS-DILUTED> 0.95
</TABLE>
